Denny's Looks Ahead After Volatile First Quarter

The word volatile or volatility came up seven times during Denny’s first-quarter earnings call on Tuesday. As John Miller, president and chief executive officer said, the descriptor is an apt way to sum up the entire restaurant industry right now, as well as the challenging climate the brand faces as it looks to revitalizes one of America’s classic chains.

Denny’s domestic system-wide same-store sales dropped 1.1 percent year-over-year, including a decrease of 1.6 percent at company restaurants and 1.1 percent at domestic franchise locations. “While we anticipated some relative softness, our same-store sales performance was even weaker than we anticipated,” Miller said in the call. “First-quarter domestic same-store sales saw a slight benefit from the New Year shift in January. But we’re particularly challenged by federal income tax refund delays in February, followed by the Easter and spring break holiday mismatch in March. These events collectively weighed on first quarter systems same-store sales by approximately 90 to 100 basis points.”

Denny’s ended the quarter with 1,731 total restaurants. Franchisees opened eight units and closed 10 others in the first quarter. The company opened eight restaurants, including three internationally in Canada, Mexico, and the Philippines, bringing the international footprint to 126 units—a growth of more than 60 percent since 2009. Denny’s also has plans for 80 more openings outside of the U.S., Miller said, adding that the chain acquired three restaurants located in proximity to the corporate headquarters in Spartanburg, South Carolina, in the quarter.

Mark Wolfinger, Denny’s chief financial officer and chief administrative officer, said the success of this past month has kept expectations moving forward. “In summary, the first quarter was volatile, but we have been encouraged by our sales performance in April, accordingly we are not making any changes to our business outlook at this point. As we have done in the past, we will revise our guidance expectations in connection with future quarterly earnings updates, if needed,” he said.

Denny’s 2017 estimates are flat to 2 percent same-store sales growth; the opening of 45—50 new restaurants with a net growth of 1o—20 restaurants; and total operating revenue between $523—$532 million.

In the first quarter, Denny’s net income was $8.4 million, or 11 cents per diluted share, down from $10 million and 13 cents per diluted share year-over-year.

“As we articulated during our last earnings call, we expect the challenges currently facing the restaurant industry to persist for the foreseeable future. However, we are committed to profitable system sales growth, and market share gains,” Miller said.

To get there, Miller said Denny’s will continue to invest in the brand coupled with the company’s “shareholder-friendly allocation of free cash flow in the form of share buyback.”

“It is our intention to continue our buyback program and return capital to our shareholders as we move forward,” he said. “… we remain focused on continuing the transformation of the Denny’s brand through the ongoing evolution of our food, service and atmosphere, while building a sustainable foundation to grow around the world.”

Denny’s $2 $4 $6 $8 value menu remained a major driving point. Miller said one in five guests cite the deal as the reason they visit, adding that the brand will continue evolving the offerings in order to provide variety and maximize margins.

One area Denny’s is looking to grow is its burger offerings. Miller said burgers represent an opportunity to expand the dinner daypart business.

“Our media messaging is currently focused on our quality burgers with our hand-pressed 100 percent pure beef, fresh toppings, and bold flavors that are made to order and start at a compelling price of $6.99,” he said.

This burger menu looks nothing like it used to. Denny’s is testing bold flavors, such as the Bacon Gouda Burger and Honey Jalapeno Bacon Sriracha Burger, which rolled out in the latest LTO menu along with a cake batter milkshake.

“We have a Slamburger that’s done a really well. We are building on top of a bourbon barbecue burger that is rolled out a couple of years ago in LTO, now made a permanent spot on the menu. So we have an array of things now, that—an avocado bacon burger, Build Your Own Burger category. And then we have the Double Cheeseburger, which is quite popular at Denny’s. So seven to eight burgers on the regular basis, that shows in our menu and this promotion is just to reinforce how far we’ve come in that category,” Wolfinger said.

Miller added that Denny’s remodeling program has garnered positive guest feedback and is generating a mid-single-digit range sale lift. Franchisees remodeled 71 restaurants in the first quarter and Denny’s expects more than 75 percent of the system to update by the end of 2017.

Miller said he expects Denny’s to reflect the times in a positive way as sentiment turns around.

“Despite this choppy environment, we fared well on a relative basis, once again outperforming key industry benchmarks,” Miller said. “Our consistent outperformance versus our category reflects the momentum generated by our brand revitalization initiatives and we remain committed to achieving our vision of being the world’s largest, most admired and beloved family of local restaurants.”